Biden Has Few Options to Lower Gasoline Prices
The Organization of the Petroleum Exporting Countries and allied producers (OPEC+) has shrugged off pressure from President Joe Biden for higher production. Yesterday the group reaffirmed its plans to add 400,000 barrels per day to the market each month. The Biden administration is deeply concerned about gasoline prices and broader inflationary pressures, and escalating rhetoric suggests it feels compelled to act. Unfortunately, presidents have few good options to counteract high gasoline prices, and most market interventions could backfire.
For several weeks, the Biden administration has blamed OPEC+ for high gasoline prices in the United States. White House officials have pressured Saudi Arabia, the United Arab Emirates, and other OPEC+ states to pump more oil. But on November 4, OPEC+ brushed off pressure from the United States and other major consumers for even higher production. The group is content with higher oil prices in the fourth quarter and pleased that the supply deficit has been draining inventories. Most importantly, OPEC+ is wary of oversupplying the market heading into 2022, citing downside demand risks from Covid-19 and new non-OPEC supplies expected next year. Saudi energy minister Abdulaziz bin Salman attributes high gasoline prices in the United States to low inventories, refinery outages from Hurricane Ida, and high ethanol prices. He even tried to argue yesterday that OPEC+ is acting as a responsible regulator of the oil market.
The Biden administration criticized OPEC+ and suggested it will act, but most options are risky and could bring unintended consequences. The White House has made several small moves but could consider a sale of strategic reserves, moves to relax ethanol blending requirements for refiners, or the “nuclear option” of restricting exports of crude oil. It is worth examining the impact and risks of each option.
Small Toolkit, Blunt Instruments
A Strategic Petroleum Reserve (SPR) sale is Biden’s most likely move. The SPR, established after the 1973 oil shock to counter disruptions to crude supplies, currently holds about 613 million barrels. As of June 2020, sour crude (sulfur content greater than 0.5 percent) made up about 60 percent of SPR barrels and sweet crude the remaining 40 percent. Typically, presidents have authorized SPR emergency releases only in response to disruptions such as the first Gulf War (1991), Hurricane Katrina (2005), and outages in Libya (2011). The Department of Energy has also conducted SPR exchanges to address short-term supply disruptions from hurricanes, effectively loaning crude to refiners to be repaid with interest in the form of additional barrels. An SPR sale of 20 million barrels is already underway this fall, as part of plans approved by Congress in 2015 to hold non-emergency sales to help meet spending needs.
An SPR sale—potentially as part of a coordinated release under International Energy Agency auspices—is probably the least-cost option for Biden. A sale of up to 30 million barrels could be completed within two weeks and would show that the White House wants to cool prices. But the SPR is meant to cope with short-term market disruptions, not structural or longer-term supply issues. The impact of a sale would be short lived, and it is not clear that releasing strategic stocks would help the market to adjust any faster than it would otherwise. At the moment, Gulf Coast refineries might welcome more sour crude following the outages associated with Hurricane Ida. But generally, the U.S. refining system is not short of crude—and as always, gasoline prices in the United States reflect global market conditions.
The Biden administration could also try to support refiners. The price of renewable identification numbers (RINs)—the credits generated by producers of renewable fuels that are traded as the “currency” of the renewable fuels standard—have climbed rapidly, mostly due to costlier feedstocks for renewable fuels. RIN prices have lifted renewable volume obligation costs and probably added 15 cents to the per gallon price of gasoline in October, according to ESAI Energy. The Biden administration has limited recourse to control RIN prices, but it could slow-walk efforts to introduce blending requirements for 15 percent ethanol blend (E15) gasoline. Generally the White House might be inclined to take actions to lower compliance costs associated with renewable fuels, especially for small refiners.
Oil market chatter has suggested a potential White House move to restrict crude oil exports, largely based on one comment last month by Energy Secretary Jennifer Granholm, but this is very unlikely. The International Emergency Economic Powers Act gives the president the authority to restrict crude oil exports in the event of a national emergency. The 2015 legislation that repealed the crude oil export ban also allows some exceptions under extraordinary circumstances—for example, if the president finds that crude oil exports have led to shortages or harmed U.S. workers. But $80 per barrel crude hardly constitutes a national emergency, and reimposing a ban on crude exports could backfire. Banning exports could potentially help U.S. refiners to access cheaper domestic crude but would create a quality mismatch for refineries configured to run heavier rather than light, sweet crude. East Coast refineries also price petroleum products based on Brent, and higher input prices would lead them to pass on costs to consumers in the form of higher gasoline prices. Moving crude or products from the Gulf Coast to the East Coast is constrained by Jones Act requirements, and waivers are complicated and controversial. A move to restrict crude oil exports would also be a political minefield, with intense backlash in energy-producing states, where producers and coastal refineries want export options. In short, reimposing a crude oil export ban could have disastrous effects.
Time for a Recalibration?
Presidents seeking to tame gasoline prices have few options—but rhetoric from the White House probably has a bigger impact than risky, short-term market interventions. Biden, defending his calls for OPEC+ to produce more oil, has noted that the energy transition will take time. But his administration could use this opportunity to soften its messages on energy.
It is unfair to blame Biden for the run-up in oil prices. Killing the Keystone XL pipeline had nothing to do with the current market, and despite its efforts to restrict new leasing, his administration is approving drilling permits on public lands at a healthy clip. The argument that the environmental, social, and governance movement, climate activists, and a sympathetic White House are killing off investment in the oil patch does not hold up under scrutiny.
Still, the Biden administration has taken oil and gas investment for granted and is now discovering that the shale sector is simply not as elastic as it used to be. After years of delivering poor returns, oil and gas companies face investor pressure to maintain capital discipline and prioritize debt repayments and shareholder returns. U.S. oil production will grow in 2022, but not at the breakneck speed of previous years. It is riskier to impose restrictions on a leaner industry.
The administration’s best move would not be an SPR sale, or tweaks to renewable fuel standards, or a crude export ban, but rather a recalibration. Biden can make the case that in order to accelerate the energy transition, we need continued investment in oil and gas to meet energy security needs—not just from OPEC+ states but on public and private lands. Prices at this level are a headache for any president, but not a crisis. Sometimes it is best to let markets run their course.
Ben Cahill is a senior fellow with the Energy Security and Climate Change Program at the Center for Strategic and International Studies in Washington, D.C.
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